Monday, November 21, 2011

"But… but… but… If the cost of mining gold falls and we mine more gold and have more gold coins, the money stock has increased and we have the illusion of artificial (non-gold) wealth, which for von Mises ought indeed to distort market signals. Improved gold mining technology ought, for von Mises, to be as bad a thing as running a printing press.

But it very clearly isn't. I have found nothing anywhere in the Austrian corpus about the baneful effects of improvements in gold mining technology, and how they invariably lead to an Austrian boom-bust cycle--how a gold discovery distorts market signals and creates the illusion of artificial wealth just as any other monetary expansion does."

This is all quite true, and as I and a few others in his comment section noted, I probably should have just said "relatively stable measure" in the first place, because clearly gold is not a perfectly stable measure. In an email, Brad says:

"I know that von Mises explicitly holds a subjective utility theory of value [note well, all Austrians who have been accusing Brad of never reading a word of Mises]. But an immediate consequence of such a subjective utility theory is that a given quantity of money is equally good no matter where it comes from--it has the same subjective value, after all. And it seems very clear to me that for von Mises a given quantity of gold money is much better than that same quantity of paper money."

I disagree with that last sentence. If paper money increased at the same rate that the gold supply increased, I don't think you'd have nearly as much complaints about it from Mises.

But these paper/gold comparisons seem to be getting a little off track to me. I enjoy rubbernecking at the horrific train wreck that is gold-buggism as much as anyone, but the real concern seems to me to be the artificiality of money creation in general. I hope Brad can accept the argument that Bill Woolsey and I make, that gold was acceptable because its rate of increase was small and relatively unrelated to political meddling - and that if the rate of increase in the gold supply had been as rapid and manipulable as that of the paper money supply, Mises would have more concerns.

That having been said, I think the real question is "why does Mises consider an increase in the supply of money in response to a recession 'artificial', given that what we are responding to is an increase in the subjective valuation of liquid money - i.e., an increase in the demand for money?" That's the real question for Mises. And the answer, I think, is that he doesn't see an increase in the subjective valuation of liquid money as the cause of recessions. He sees the cause of recessions as a rearrangement of the capital structure after an "artificial" boom. If Keynesians really want to offer a critique of Mises in a language he understands, they would say "Mises is suggesting that in the face of changes in individual subjective valuations of money, the state, by fiat, ought to keep the money supply fixed." Because that's really what Mises and any Austrian who wants a gold standard (::cough::Ron Paul::cough::) is proposing.

"If paper money increased at the same rate that the gold supply increased, I don't think you'd have nearly as much complaints about it from Mises."

Yes. Mises makes this point explicitly in quite a few places. What he's looking for is an end to political manipulation of the money supply. That's why he supports the gold standard. He accepts that in the long run any quantity of money can perform the purpose of money. He's worried about short-run disturbance to calculation. (I explain that in my own terms here http://www.cobdencentre.org/2011/02/money-is-barren-but-occasionally-covers-us-in-dust/ ).

"If Keynesians really want to offer a critique of Mises in a language he understands, they would say 'Mises is suggesting that in the face of changes in individual subjective valuations of money, the state, by fiat, ought to keep the money supply fixed.' Because that's really what Mises and any Austrian who wants a gold standard (::cough::Ron Paul::cough::) is proposing."

This is an argument monetary disequilibrium folks like me have been making for ages.

In Mises the subject is frustratingly confusing. In "The Theory of Money and Credit" he accepts that the demand for money varies and indicates in places that he thinks supply should vary accordingly. But, in other places he gives the opposite opinion, and he gives that opinion later too. There are many ways to interpret it, though I'm not particular interested in that question.

The issue of gold aside, Ludwig von Mises's definition of uncertainty (he was influenced by his brother, the mathematician Richard von Mises, who followed a frequentist interpretation of probability) has problems for his economics...never mind the rest of the Austrian School.

I understand recently he claimed that to Hayek the whole of necessary knowledge to coordinate the market economy is contained in the dispersed knowledge of the actors. AFAIK Hayek never wrote that.

Similarly, to Mises there is "case" and "class" probability. Class probability is frequentist probability derived from scientific methods. Case probability is an estimate of probability made to fit a particular one-off case by some formal or informal process. Mises emphasises that case probabilities are what economic actors generally deal with.

While I don't agree with Michael Emmett Brady on everything, I do agree with him that the Austrians talk a lot about uncertainty, but don't seem to fully digest it's implications. (As an aside, Brady is well-trained in mathematics - as a decision theorist, he can make that critique.) Hayek does not explicitly say that, of course, but he implies that all the knowledge aggregates together. In any case, other scholars besides Brady have criticised the Austrians on this.

As for the von Mises brothers, as far as I can tell, his critique still holds.

That having been said, I think the real question is "why does Mises consider an increase in the supply of money in response to a recession 'artificial', given that what we are responding to is an increase in the subjective valuation of liquid money - i.e., an increase in the demand for money?" That's the real question for Mises.

*That* is the real question? "If people want more money, why don't we just print it and give it to them?" In case the answer isn't obvious, why don't we print up a bunch of claims to computers and give them to people whenever they increase their demand for computers?

If Keynesians really want to offer a critique of Mises in a language he understands, they would say "Mises is suggesting that in the face of changes in individual subjective valuations of money, the state, by fiat, ought to keep the money supply fixed." Because that's really what Mises and any Austrian who wants a gold standard (::cough::Ron Paul::cough::) is proposing.

This is a perfectly valid argument against a gold standard, although not one I've heard often. It's true, Mises would recommend the state fix, by fiat, the amount of money in society despite what everyone wants. Under 99% of circumstances, that's a good thing. But I won't deny that Mises was mistake on this issue. The gold standard is imperfect after all.

The best solution is a free market in money. I'm not sure if Mises ever got that far.

"Free banking is the only method avaiable for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would be impossible for credit expansion with all its inevitable consequences to have developed into a regular -- one is tempted to say normal -- feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions."

If you think it is then you don't understand the meaning of the word "demand". Mises specifically addresses this point in exactly this context. In part XVII section 3 of "Human Action" Mises writes:"Media of exchange are economic goods. They are scarce; there is [p. 402] a demand for them. There are on the market people who desire to acquire them and are ready to exchange goods and services against them. Media of exchange have value in exchange. People make sacrifices for their acquisition; they pay 'prices' for them. The peculiarity of these prices lies merely in the fact that they cannot be expressed in terms of money. In reference to the vendible goods and services we speak of prices or of money prices. In reference to money we speak of its purchasing power with regard to various vendible goods."

He goes on to say:"Another objection raised against the notion of the demand for money was this: The marginal utility of the money unit decreases much more slowly than that of the other commodities; in fact its decrease is so slow that it can be practically ignored. With regard to money nobody ever says that his demand is satisfied, and nobody ever forsakes an opportunity to acquire more money provided the sacrifice required is not too great. It is therefore impermissible to consider the demand for money as limited. The very notion of an unlimited demand is, however, contradictory. This popular reasoning is entirely fallacious. It confounds the demand for money for cash holding with the desire for more wealth as expressed in terms of money. He who says that his thirst for more money can never be quenched, does not mean to say that his cash holding can never be too large. What he really means is that he can never be rich enough. If additional money flows into his hands, he will not use it for an increase of his cash balance or he will use only a part of it for this purpose. He will expend the surplus either for instantaneous consumption or for investment. Nobody ever keeps more money than he wants to have as cash holding."

A "Demand" in economic sense, we must remember, is an offer of one thing for another, not a desire.

Silas: "'If people want more money, why don't we just print it and give it to them?' In case the answer isn't obvious, why don't we print up a bunch of claims to computers and give them to people whenever they increase their demand for computers?"

Money is not the same as computers. People want computers to use them, people want money to spend it. Mises deals with this point too, in "The Theory of Money and Credit" Part 1 Chapter 3 section 1.

"On the other hand, arguments of considerable weight may be urged in favor of including all money substitutes without exception in the single concept of money. It may be pointed out, for instance, that the significance of perfectly secure and liquid claims to money is quite different from that of claims to other economic goods; that whereas a claim on a commodity must sooner or later be liquidated, this is not necessarily true of claims to money. Such claims may pass from hand to hand for indefinite periods and so take the place of money without any attempt being made to liquidate them. It may be pointed out that those who require money will be quite satisfied with such claims as these, and that those who wish to spend money will find that these claims answer their purpose just as well; and that consequently the supply of money substitutes must be reckoned in with that of money, and the demand for them with the demand for money. It may further be pointed out that whereas it is impossible to satisfy an increase in the demand, say, for bread by issuing more breadtickets without adding to the actual supply of bread itself, it is perfectly possible to satisfy an increased demand for money by just such a process as this. It may be argued, in brief, that money substitutes have certain peculiarities of which account is best taken by including them in the concept of money."

The questions this brings up are:* Can secure claims to money be created? (I would say "yes", Rothbardians would say "no").* If they can be how would the supply of money be varied to match demand? That is a more complex question.

Regarding Skylien's point.... Mises advocates free banking as a step to be taken *after* a gold-standard is in place in several of his books: "The Theory of Money and Credit", "The Causes of Economic Crises" and in "Human Action".

Current: First off, Richard von Mises considered Keynes to be a subjectivist, when Keynes was not, for one thing. Keynes was part of a tradition called the "logical interpretation" of probability, in much the same way Carnap was.

Also, Hayek adopted the notion of uncertainty only after Keynes's revolution came around, and paid lip service to it. The result was that there have been confusions over the definition.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1920578

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1920569

The Austrians also talk of uncertainty, but never seem to provide a technical analysis of it, like Keynes does in "A Treatise on Probability" with a 'weight of evidence' type of concept, or in the form of an interval estimate.

All Austrians do is pay lip service, acknowledging it's existence but never thinking through what a weight of 0 (total uncertainty) means.

Actually Daniel you have a point. I think making an appeal to internet 'Austrians' who have been sucked in by the we-are-lone-freedom-fighters-in-a-statist-world narrative and the ridiculous ad homs and strawmen that they use to argue against Keynes might get some on our side.

b) Having no regulations for money is impossible as the government have to have some criteria for what they accept as taxes. The production of money therefore needs to be regulated or it becomes meaningless.

@Current: Money is not the same as computers. People want computers to use them, people want money to spend it.

Right, that's why I compared money to CLAIMS for computers (which people also want to spend) precisely to avoid this objection, and precisely why you had to edit my words in order to come up with a sensible objection.

Regarding your other response, it looks like the Mises quote agrees with me: demand for money is *not* limited.

Silas: "Right, that's why I compared money to CLAIMS for computers (which people also want to spend) precisely to avoid this objection, and precisely why you had to edit my words in order to come up with a sensible objection."

I didn't edit your words. The point here is made quite well by the quote I give from "The Theory of Money and Credit". The purpose of obtaining a claim to a computer could only be in order to obtain a computer soon afterwards. A person may obtain a claim to money in order to use it to obtain money soon afterwards, but that's not the only case. If a claim to money is secure and known to be secure then there is no reason to exercise it, others will accept it in lieu of money. If claims to money are good then they may circulate instead of money.

Silas: "demand for money is *not* limited. "

Mises is disagreeeing with you.... In the section I quote above Mises says "The very notion of an unlimited demand is, however, contradictory."

Mises begins by giving a non-economists view of the situation: "With regard to money nobody ever says that his demand is satisfied, and nobody ever forsakes an opportunity to acquire more money provided the sacrifice required is not too great. It is therefore impermissible to consider the demand for money as limited."

He then goes on to give the economists view of the situation "The very notion of an unlimited demand is, however, contradictory. This popular reasoning is entirely fallacious. It confounds the demand for money for cash holding with the desire for more wealth as expressed in terms of money. He who says that his thirst for more money can never be quenched, does not mean to say that his cash holding can never be too large. What he really means is that he can never be rich enough."

You're attempting to conflate demand and desire here, when they're quite separate ideas. There certainly is a finite demand for money because there is only a finite amount of other goods that can be traded for money.

No I didn't several posts about it says clearly "why don't we print up a bunch of claims to computers", which is me quoting you. I agree that I was slightly confused about what you meant initially.

Of-course you can back out if you want, I doubt Daniel wants inter-austrian disputes on his comment threads anyway. I'll add one last things though. That is that my view on the two questions here is not controversial even amongst Austrian Economists. Rothbard believed that there is such a thing as the demand for money and that it's finite. Rothbards view was that claims to money could only circulate on par with money if a government tooks steps to force that to happen.

I know that DeLong has recently gone on these tirades accusing Misesians as being labor or production based purists. This simply is not the case. The question that Mises grapples with is whose production and whose labor (Hayek borrowed this idea from Mises).

The form of money isn't the prime focus, it is by whence it becomes the money.

"There is not a single fact or event that could make the average Austrian change their opinion."

DISCLOSURE: When I first started browsing econ based sites and blogs, I took some degree of interest in the Austrian School and was even a regular poster briefly at Mises.Org forums.

But, seeing other points of view have made me move away from that as well.

I would not have taken interest in the Austrians if I were not capable of changing my mind or challenging my assumptions, and I would not have moved on to other points of views if I were not capable of the same.

A very strong role is played by Bob Murphy, Walter Block, Brad DeLong, Daniel Keuhn, Gene Callahan, Paul Krugman, Jared Bernstein,.etc in challenging any assumptions that I would have held only yesterday. Bloggers and columnists do - bit by bit - change and sway minds.

I fully agree. I am not an economist or political theorist, but I do enjoy studying those subjects. For those interested in ideas and debate, blogs make a fantastic platform. Sure, minds don't always change, but sometimes they do. All we're doing is looking for the answers to the reality of our surroundings, and it is extremely helpful to correspond with those seeking the same even if they hold a different point of view.

I have learned far more from the people that I disagree with than I ever have from those that I completely agree with.